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Editor’s Letter: Enjoy the view from the peak while it lasts

Welcome to our quarterly wrap-up issue, which could just as well be called “view from the peak.” What we saw in the second quarter — just like in the first quarter — is strong deal activity driven by aggressive general partners and hyper fundraising boosted by hungry limited partners.

It’s all a function of the strong markets and the increasing popularity of the private markets, to which more institutions than ever are trying to build exposure.

In this issue, readers will get a sense of just how aggressive GPs have become when trying to win a deal.

Our cover story (page 28) reports that buyers are trying get in front of sellers as early as possible to try to preempt an auction. Dean Mihas, managing director at GTCR, told us one in every five processes is cut short because a buyer made a strong bid before an auction had begun.

Sources also told us that GPs are putting in full equity to stand out from their competitors. That’s like buying a house with all-cash: Even if your offer is slightly lower than others, the prospect of having the cash in an account on day one has to be tempting to the seller. They don’t have to worry about the time lag and potential uncertainty of waiting for a financing package coming together.

We also heard that, in the high-priced deal environment, GPs and lenders have gotten more conservative when accepting certain provisions in deals that have become commonplace in the past few years. This specifically involves earnings adjustments, which have expanded to include factors like the weather and M&A expenses.

“Buyers are willing to pay high multiples for good businesses, but they are not willing anymore to pay high multiples for good businesses on really flimsy earnings, earnings that have too many adjustments or [earnings] that have too much add-back activity,” Morgan Stanley’s Aaron Sack told us. “People are starting to say ‘no more on fake, low-quality Ebitda.’”

In the peak environment, buyers and sellers are having to pick their battles.

One thing that is clear is that the good times aren’t showing any signs of slowing down. As you’ll read in our quarterly fundraising article (page 46), GPs got off to a faster start this year than in 2018, raising about $160 billion in the first six months of the year, compared to $86 billion in the same period last year.

The best-performing GPs are coming back to market faster, as well as creating new products for their existing LPs to back. Add to this emerging managers struggling to raise early funds and it all makes for a super-charged fundraising environment.

We’re solidly on the peak, and we’ve been here for a while. The view sure is nice up here. Hopefully we won’t have to start climbing down any time soon.